A Simple Matter of Software

Simplify to find the essence

"Our lives are frittered away by detail; simplify, simplify."
                                                              — Henry David Thoreau

Design principle from creator of first Wiki

“What is the simplest thing that could possibly work?”
                                                              - Ward Cunningham

Leverage

To quickly generate dramatic growth in usage ventures need to use "leverage" to their advantage.

Marc Andreessen provided a simple definition of leverage, while discussing which businesses fit the "venture-backed startup model":

Startups that have a credible potential to be sold or go public for a 10x gain on invested capital within 4 to 6 years of the date of funding should consider raising venture capital.

Most other startups should not raise venture capital. This includes: ... startups where there's no inherent leverage in the business model that could result in a 10x gain in 4 to 6 years ...

Notably, there are many fine businesses in the world -- many of them highly profitable, and very satisfying to run -- that do not have leverage in their model that makes them suitable for venture capital investment.

By leverage in this context, I mean: the ability to make something once (a piece of software, a chip design, a web site) and sell it (directly or indirectly) to a lot of people (1,000 business customers or 10 million consumers) -- which leads to the classic "hockey stick" revenue projection.

While the above is acknowledged as true in the abstract, in practice actual startups often lose sight of this point and create patterns where there is not enough leverage.

Here is one typical software venture scenario:

• Start-up with no revenue and no market presence feels intense pressure to land some key large customers to establish their credibility and prove the value of their business proposition.
     
• Those initial large customers are hesitant to work with a small unproven company.  The start-up responds by saying "we may be small, but that is an advantage as we can be nimble and quickly deliver to you a product/service that exactly matches your specific individual requirements"
     
• This pitch succeeds and lands some important initial customers.  Because they see something working (after a long period of struggling) the sales team repeats the same pitch to other potential customers.
     
• Under pressure to move quickly the software team does not build a configurable platform but rather does customer-specific source modifications to the core product to deliver on what each customer expects.  Which leads to multiple source branches, high maintenance cost.  low ability to deploy new features across all customers, high incremental costs per each new customer, etc.

The above scenario is common and can lead directly to falling into a low leverage trap.

There are absolutely times when doing a low leverage special feature for a specific launch customer is the right thing to do.  The question is, do you want this to be a rare exception or is it a pattern you want to replicate?

Here are two models:

1. .“On-demand individualized customer service" model focused on directly  responding to unique needs of large customers, through a negotiated delivery plan.  “Professional services” companies such as IBM Global Services and Infosys fit this model.  As does a large part of the Defense industry: companies such as SAIC.
      
   
   B.
2. "Market service" model focused on executing roadmap that delivers high leverage: creating a single unified service/product that meets the needs of the broad market. Examples here include: eBay, Amazon, Google, Adobe, and Microsoft.

Successful businesses can be built using either model.  However, the "market service" model has higher leverage, higher valuations, and greater probability of leading to fundamental changes to how we work and live. 

If you have the opportunity to pursue this "market service" model you should clearly do so, even if it means extra effort and extra risk.

If your business does not lend itself to pursuing the "market service" model that is ok too, you can build a good business creating custom solutions for large customers.  However, that approach will mean slower growth than a successfull "market service" model and you need to make sure your team and investors understand that.

The one thing that absolutely does not work is to be mis-aligned:  you claim you are aimed at one of the models and some of your activities reflect that, but a large part of your actual behavior fits the other model the one you are not targeting.  This is a recipe for painful failure.

Committing to building a high leverage model takes real discipline: the engineering team has to avoid taking tempting (but non-scalable) shortcuts, the sales team will sometimes need to pass on a customer which goes against all instincts.  However, if you can recognize the difference between urgent and important, and instill that self-discipline you will be well rewarded.

                                                                               copyright 2007 Kerry Champion